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IFRS, a new phase in financial reporting

The stock market crash and the ensuing great depression in the early part of the 20th century is perhaps just a dream to the present generation.

The world best seller "Gone with the Wind" by celebrated author Margaret Mitchell that also became a celluloid epic gives a vivid illustration how the families went bankrupt as during this era most people were heavily dependent in the stock market.

Such was the impact of the 1929 crash. In the 1997 East Asian crisis created a major debacle that heavily affected the strong economy of the South Asian tigers who built strong economies within a wave of new industrialization. The South Asian crisis was followed by the Russian Ruble crisis that did affect Sri Lankan tea trade. In the new millennium a different crisis hit global business with the Enron and Worldcom accounting frauds exposed unbelievable corporate crimes thus exposing fraudulent activities of the company CEO's and CFO's resulting in these high officers being sentenced to imprisonment.

Another casualty was the auditors Arthur Anderson. These events certainly did cause some stress among the global accounting community and some remedial measures were considered necessary to restore confidence among the public. As a consequence United States a country that was affected enacted the "Sarbanes Oxley" Act (Sarbox) to strengthen controls to instill some degree of faith in the business and investor community.

Within a decade of this happening, the global financial crisis originating from the collapse of the Lehman brothers to giant Bank of Scotland left a wave of destruction or a financial tsunami right across the highly inter connected world plunging the economies into absolute turmoil causing the great depression II.

One of the main accusations for this catastrophe was the allegation that the financial sector was not adequately regulated while another issue was the extraordinary compensation of high officers. Economies in the US and Europe have yet failed to recover thus causing a plethora of problems such as unemployment mounting.

US authorities reacted promptly and the result was the Dodd-Frank Wall Street reform and consumer protection act that proposed a series of far reaching reforms such as eliminating bail outs at taxpayers' expense, transparency in governance, strengthening audit and compensation committees, setting up of financial stability oversight council and even funeral plans (rapid and orderly shut down for large financial institutions in the event of a failure).

"While the sort of heedless risk-taking has led to lucrative returns for many financiers in recent decades, the vulnerabilities in the financial system that have been exposed by the crisis must at some point lead to an accounting-not only of the practices that have become common on Wall Street but of the principles that underline them.

When the history of the great recession is written, they can be singled out as the bonus babies who were short-sighted that they put the economy at a risk and contributed to the destruction of their own companies - (Too big to fall-Andrew Ross Sorkin)"

Frequency of these catastrophes no doubt posed a heavy challenge to standard setters of accounting and auditing profession to reexamine the existing standards in a bid to enhance uniformity of measurement and accurate reporting. Financial reporting a key instrument in public accountability plays a significant role in attracting the investor community.

Today Sri Lanka is pursuing a major drive to increase the foreign direct investments to strengthen external finances. Adherences to established standards give a sort of confidence potential to the investing community. The responsibility of formulating the accounting standards in Sri Lanka rests with the Institute of Chartered Accountants in Sri Lanka.

"In the wake of the unprecedented number of corporate failures that have taken place in different parts of the world, the regulators have become more stringent. Standards setters such as IASB, FASB, FRC, PCOAB have started revising technical standards. In this backdrop the role of the auditor has come to the spotlight and is under scrutiny than ever before. The public and regulators in particular demand a higher standard of quality from auditors. (Suranga Indunil - The Chartered Accountant)"

The enforcement of International Finance Reporting Standards (IFRS) that becomes mandatory from January 2012 poses many challenges to the global accountancy profession.

IFRS are the accounting and disclosure rules for corporate financial reporting, as established by the International Accounting Standards Board (IASB) based in London whose purpose is to develop clear, globally applicable rules for reporting financial status to investors and stakeholders.

IFRS has broad global coverage and it is said that more than 110 countries currently require or allow reporting using IFRS's.

Rules created by the IASB are applied automatically at a number of stock exchanges including Australia and European exchanges. China are said to be 'substantially converged' in addition to US, Brazil, Canada, India, South Korea, Mexico, Argentina, Japan, Indonesia and Russia.

Convergence to IFRS though not very complex is a huge challenge even in Sri Lanka for listed companies and even the auditors.

The Institute of Chartered Accountants of Sri Lanka however has taken early steps to converge Sri Lanka Accounting Standards (SLAS) with IFRS in 2012 by issuing SLFRS in 2012 by issuing SLFRS and LKAS to cover the accounting period commencing from 2012. This must be preceded by comparatives for 2011.

IFRS embraces a variety of issues outside pure accounting such as business, taxation and regulatory and modifications to the ERP systems. All these require appropriately competent personnel along with close supervision.

IFRS also brings in a new classification basis for financial instruments and the requirement to use the skills and knowledge of valuers and actuarists.

The audit committees too will be burdened with responsibilities for ensuring the total involvement of the auditors in the conversion process and ensuring that the management is adopting the right policies. Since much is expected from auditors it is of paramount importance that auditors are well equipped.

It is a consolation that application of IFRS for SME's a key player in the country's business sector will be minimal with the availability of a separate standard. "A key governance challenge facing most of the listed companies in Sri Lanka this year is the conversion to the new accounting standards issued by the Institute of Chartered Accountants of Sri Lanka comprising SLFRS and LKAS.

Most companies are still living under the illusion that SLFRS is not much different from current accounting, and it can be considered when preparing financial statements at the end of the financial year.

In the backdrop of these far reaching changes boards and audit committees should consider how to monitor the quality and integrity of company's internal conversion process, and how to ensure that the communication to investors of the impact of SLFRS on reported results does not have an adverse share price impact that is not justified by the underlying facts - (Ernst & Young)"

 

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